Too Big to Fail

March 14, 2010 at 8:59 pm 1 comment

Too Big to Fail is both the name of a book published in 2009 by Andrew Sorkin and a financial concept of some companies being too large to fail without also taking down the entire economy of a nation. Sorkin is a financial correspondent for the New York Times who began there as a kind of journalistic wunderkind and now owns his own web based financial news source: To read more about him, see this online article from New York Magazine:

Sorkin thoroughly and painstakingly researched the United States economic crisis and subsequent bailout of major US banks and financial services institutions, including everybody’s favorite, Goldman Sachs. All this happened in the fall of 2008 during the last Presidential election. The book was published a year later.

The book is over 600 pages long, with tons of footnotes and references and sources. He got individuals directly involved in the crisis to speak with him as sources and pulled public records from government employees involved using the Freedom of Information Act. He scoured the news for relevant articles from fellow journalists.

The result is not as dry as you might think. It almost reads like a novel, with a lot of characterization and dialogue. There are so many characters that few distinguish themselves. Reading the book is kind of like watching a Mexican soap opera set in the world of high finance, except with a lot of bald middle-aged men and few hot women. But aren’t you glad that I read it for you so you don’t have to?

Things I got out of Andrew Sorkin’s book, Too Big to Fail:

  • Dick Fuld of Lehman Brothers is a kind and loyal man who is also shortsighted, befuddled, and maybe even inept. However, he didn’t singlehandedly cause Lehman Brothers to fail. Blaming him for the crisis or even singlehandedly for the failure of Lehman Brothers, is a mistake.
  • Jamie Dimon of JP Morgan Chase comes across as shrewd and a bit of an asshole. However, he’s a pretty sharp guy and a patriotic American. He was not always self serving during the crisis.
  • Timothy Geithner the current Secretary of the Treasury in Obama’s administration, was the President of the Federal Reserve Bank of New York during the crisis. He was a big intervention strategist, preferring to work behind the scenes to merge troubled financial institutions and find them private funding, if available. He’s well connected and ambitious, as well as a former Goldman Sachs employee.
  • Bob Diamond of Barclays comes across as naïve in not anticipating that the British government would have a bigger issue with approving a merger with Barclays to bail out a troubled Lehman Brothers. Later, he just comes across as one lucky and opportunistic son of a bitch when he gets to bid for the parts of Lehman that he wanted for next to nothing after Lehman goes into bankruptcy. Maybe he’s naïve like a fox?
  • Hank Paulson, the Secretary of the Treasury under George W. Bush, at the time of the crisis, and also a former Goldman Sachs employee. He only had the job for a little over two years. It’s not fair to blame him for the crisis, either. The conditions that put things into play were present long before he was in a position to do anything about them.
  • No one knows yet all of the factors that led to the near collapse of the American economy. We may never know. Indeed, some of the most sophisticated and intellectual financial minds of our time could not make heads nor tails of the books of many of the companies that were in trouble. Balance sheets, annual reports and earnings statements seem to have been colorfully estimated.
  • Here’s a thought, though. Maybe one of the reasons the economy went belly up is because these companies couldn’t even accurately account for their own assets and debts. Why would they do this creative accounting? Because their profits and their bonuses are based on fudging these figures. They just didn’t foresee a time when the piper might come calling.
  • Here’s another thought: Maybe we ought to require financial services companies and banking institutions to always have more capital on hand than they need in order to cover any outstanding debts. They can’t incur any more debt until they are sufficiently capitalized.
  • And let’s regulate this leveraging shit or put an end to it altogether []. For those critics who would say that this is interfering in our free market economy, let me remind them that we’ve already interfered in our free market economy to save these greedy fat cats’ asses while they rewarded themselves more bonuses for fucking up their companies. This time we would just be interfering to help those little people who were the share-holding victims.
  • Part of the problem with the economy in the fall of 2008 was about more than just the staggering debt held by American companies who refused to acknowledge its existence. It was also a crisis of confidence. The problem exacerbated itself as people fearing the loss of their money with the failure of financial institutions pulled their assets from those financial institutions and made a bad situation worse.
  • Some forms of investments, most notably, short selling, are about betting on a company’s failure. Most of us think of investing as providing capital to a company in the hopes that that company will succeed and our original investment will grow or that we will receive income in the form of dividends from our original investment. However, there are many different ways to invest money. Some of them are like betting on a company’s failure. This creates an opportunity for some people to actually spread rumors about a company’s financial health in order to profit from the company’s loss or even bankruptcy. This needs to be monitored very carefully. Sure, the potential for this kind of market manipulation exists in more traditional investment venues as well (Martha Stewart and insider trading, anyone?), but this type of thing seems particularly mercenary and ripe for larcenous schemes.
  • In the end, the reason our economy almost went belly-up (again) [See and] can be attributed to good old-fashioned greed and the twisting of the American dream into a materialistic idolatry of the ability to live beyond one’s means. The book doesn’t say so, but that’s my take on things. First, some banks and mortgage companies leant more money to people than they could prudently qualify for in the hopes of then selling these mortgages later to other companies at a profit, thus eliminating their own risk.
  • The Americans who received the loans were only too happy to blindingly and unquestioningly accept these loans, in some cases on downright false pretenses with bent rules and lax due diligence. In some cases, these people were actually innocent and trusting individuals, but I suspect that a good many of them were fully aware of the risks they were assuming but were happy to assume them to get that house. They would think about the consequences, if there were any, later.
  • The banks and brokerage firms saw the killings being made by the mortgage companies and wanted in on the action. So, they bought up the mortgages, not realizing as they did so, the extent to which such loans were “toxic” assets. They overestimated the ability of the American public to repay the loans and underestimated the ability of the mortgage companies to falsify documents and violate the fiduciary responsibility that they owed to their customers. And it wasn’t just the mortgage companies that are guilty. Remember, there were homeowners insurance companies (AIG, anyone?) and real estate agents who earned commissions on these sales, which were financed by these loans, that greedily got in on the action as well.
  • The notes came due, and the homeowners could not pay. Our entire economy became caught up in the mess. Other international companies that invested in American companies and investments became entangled in our mess as well. It was a global economic crisis. Let there be no mistake about that. With the modern invention of hybrid investments like mutual funds and hedge funds (among others) investing in not just companies but in other investment funds, stocks, futures, bonds and securities, many of the big players in the global economy, doubtless, had no idea of the level of their potential exposure to these “toxic” assets.

Ultimately, it all comes down to this: if Americans want to avoid another economic crisis, then we have to learn individually and collectively, as a nation, to live in the black.  It’s just that simple. The American economic crisis, like the Great Depression before it, was largely caused by one word: Greed.


Entry filed under: Books, Economy, Money and Finances, Politics.

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